On Monday, 4 April 2016 the U.S. Department of Treasury and the Internal Revenue Service unexpectedly issued temporary and proposed regulations with the stated aim of further reducing the tax benefits of and, where possible, discouraging corporate inversions.
The Regulations
According to the Department of Treasury’s press release, Monday’s temporary and proposed regulations will:
- limit inversions by disregarding foreign parent stock attributable to recent (3 year look back) inversions or acquisitions of U.S. companies. This will prevent a foreign company (including a recent inverter) that acquires multiple American companies in equity-based transactions from using the resulting increase in size to avoid the current inversion thresholds for a subsequent U.S. acquisition;
- make it more difficult for ‘inverted’ entities to reduce U.S. taxable income via earnings stripping; and
- formalise previous treasury anti inversions measures from September 2014 and November 2015.
As a result of the new Treasury regulations Pfizer and Allergan formally ended their US$160 billion proposed merger. The new regulations may also affect other ongoing inversion-type redomiciliations.
Unintended Consequences?
Concerns have also been expressed that the new restrictions on earnings stripping may affect existing Irish, UK and other non-inverted multinationals. Previously, interest paid on loans from non-U.S. group companies was often tax deductible for U.S. corporation tax purposes. From 4 April debt instruments issued by U.S. group companies to third country related companies may now be treated as equity, unless that debt is incurred to fund actual business investment, such as building or equipping a factory. This could mean that multinational groups (which do not have a U.S. holding company) that happen to operate in the U.S. may be forced to reconsider their existing tax structuring.
Contributed by David Jones
